As Italy and France prepare for next year's elections, bond investors are increasingly betting on Italy's political climate being calmer than France's. This has led asset management companies like Barings and Carmignac Gestion to increase their holdings in Italian bonds, with firms such as MFS International already bullish on Italian debt. This shift is pushing Italian bond yields down below those of French bonds of comparable maturity, a significant reversal from the historical trend where French bonds were considered safer but are now trading at a higher risk premium.
Investors are avoiding French bonds due to upcoming budget negotiations, which are expected to be a political flashpoint and influence next spring's presidential election. In contrast, there's a growing belief that Italy's era of fiscal chaos and political turmoil is over. Barings portfolio manager Brian Mangwiro, who has been buying Italian bonds with maturities up to 10 years, noted that Prime Minister Giorgia Meloni's government could be one of Italy's longest-serving and most stable, significantly reducing political turmoil risk. This sentiment marks a sharp turnaround from 2022, when Meloni's initial election led to aggressive sell-offs of Italian bonds, and reflects a structural shift in Europe's bond market since the eurozone debt crisis.
Despite global bond concerns about rising oil prices and inflation, Italian bonds are emerging as a surprising safe haven in the eurozone. This optimism is fueled by Meloni's commitment to curbing Italy's fiscal deficit, in stark contrast to potential difficulties for the current French government to achieve similar goals amidst the growing popularity of populist politician Marine Le Pen. Carmignac Gestion's fixed income manager, Marie-Anne Allier, highlighted Italy's political stability and declining debt-to-GDP ratio as major advantages compared to other European countries, including France and Germany, leading her to buy Italian bonds and short French bonds.
Natixis SA rates trader Youness Boukakiou observed a building momentum in Italian bonds, calling buying 3- to 10-year Italian bonds one of the most popular trades this summer, while many market participants avoid French bonds. He noted that if investors want yield in European sovereign bonds, Italy now looks like the better option. Additionally, ABN Amro Bank's senior rates strategist, Larissa de Barros Fritz, pointed out that only 9% of Italy's sovereign bonds are held by non-eurozone investors, compared to 26% for France, and 14% of Italian government debt is held by Italian households, providing significant support against event risks. Annalisa Piazza at MFS International remains overweight on Italian bonds, ready to increase positions if political posturing causes unwarranted sell-offs.
